Shares of ViacomCBS (VIAC +0.00%) and Roku (ROKU +0.34%) rose 3% and 5% respectively on Wednesday, fueled in part by buyout speculation following a Wall Street Journal story. A source close to Comcast's (CMCSA +0.47%) CEO Brian Roberts says that the cable and connectivity giant is scoping out the potential of a tie-up with Viacom or an acquisition of Roku.
Joining forces with ViacomCBS makes sense. It may seem like a conflict of interest for the country's leading cable provider to start playing favorites with individual media properties, but Comcast already broke that mold when it snapped up NBCUniversal more than a decade ago. Comcast's Universal Studios theme parks also have a history of working with Viacom's Nickelodeon.
A potential deal for Roku also has its merits, but it's just not as feasible. Let's go over some of the reasons why Comcast will fail if it is in fact trying to snap up the company behind fast-growing streaming platform.
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1. Roku won't come cheap
A big reason why a play for ViacomCBS makes sense is that the stock has shed more than half of its value since a short-lived springtime feeding frenzy drove the entertainment giant higher. Put another way, Comcast would be offering ViacomCBS shareholders a lifeboat. It could possibly get away with paying just a 20% to 30% premium for the parent company.
There's no reason for Roku shareholders to jump at that kind of markup. Roku is hot. The stock has more than tripled since the start of last year. A lot of last year's growth stocks have corrected sharply in 2021, but Roku is beating the market with its 27% year-to-date gain.
Roku is a 30-bagger since going public at $14 less than four years ago. Do you really think that even a 40% to 50% premium would be enough to convince the majority of its shareholders to sign away future upticks given Roku's momentum?
The counterargument here is that Roku is named after the Japanese word for the number six because this is the sixth company that founder CEO Anthony Wood started. Why wouldn't he just sell and look up the Japanese number for seven? Well, he's stuck with Roku for nearly two decades. He and his company's shareholders won't easy to buy out.
2. It could be a conflict of interest
Roku's success over the years has been its agnosticism. It plays nice with thousands of apps, and that has made it surprisingly competitive in a niche that finds it competing for streaming hub supremacy against three of the country's four most valuable companies.
Despite recent skirmishes with HBOMax, YouTube TV, and Comcast's own Peacock the market views Roku as an open-minded independent. It's now built into 38% of all smart TVs sold in this country, reaching an audience of 53.6 million homes by the end of March. Toiling away as a Comcast subsidiary could eat into that vibe.
One can argue that Roku is already starting to play favorites. It's acquiring content to make its platform more engaging, but that's a slippery slope. Thankfully for fans of Roku's agnosticism we're still not at the point where Roku Originals or even The Roku Channel is making its app partners nervous.
3. Roku under Comcast would languish
It's not just Roku's stock that's on fire. Roku's platform is exploding in popularity. Net revenue soared 79% in its latest quarter, propelled by a 32% increase in average revenue per user stacked on top of its 35% increase in active accounts over the past year. Would you really expect that kind of momentum to continue under Comcast?
Roku stock took a 14% hit in a single day in the fall of 2019 after Comcast unveiled Xfinity Flex, a rival streaming hub that it continues to include at no cost to Xfinity broadband subscribers without TV service. Xfinity Flex isn't exactly a household name, and investors probably feel pretty dumb for dumping Roku the day that Comcast introduced its Xfinity Flex dongles. It certainly wasn't a Roku killer. Roku has grown its user base by 76% in the subsequent 21 months with revenue more than doubling.
If Comcast really is trying to buy Roku it will be an admission that Xfinity Flex failed. Do you really want a company that couldn't even give away a streaming dongle running Roku? Roku's audience will just scatter to the three tech giant-owned platforms they were trying to avoid in the first place. Roku's best chance to succeed as a media stock is to walk away from any potential speed dating session unattached.
